WaCoMacro: wage contracts and macroeconomics

From April 2021 to April 2024, prices rose by 17.6 percent in both the Euro area and Norway. Central banks have responded to this inflationary episode and price inflation is now subsiding. Meanwhile, wage inflation is picking up pace. What does this mean for the economic prospects of Norway in the near and medium-term future? What does it mean for your economic prospects? An overarching goal of business-cycle research is to understand the relationship between wage inflation, price inflation, and the economy as a whole. Despite a lot of research in this area, there is still considerable uncertainty regarding many dimensions of this relationship. In this research project, we hone in on a particular dimension: the importance of how wages are set. We do so by developing new theoretical macroeconomic frameworks for how wages are set, frameworks which are detailed enough to be compared with actual individual-level data on wages and hours worked. In parallel, we work to uncover empirical facts, using Norwegian administrative data, on how wages are set, how much people work, and how both wages and hours worked depend on inflation. Combining the theoretical developments with the empirical facts, we aim to improve our understanding of the economic prospects, not only for economies as a whole (e.g., Norway) but also for the diverse set of individuals making up the economy (e.g., you!).

From April 2021 to April 2024, prices rose by 17.6% in both the Euro area and Norway. As price inflation is subsiding, wage inflation is picking up pace and worries about wage demands pushing inflation upwards are at the top of the policy agenda. This worry reflects the large uncertainty among both academics and policy makers regarding the aggregate relationship between wages, prices and real economic activity, which. There is thus a great need for a better understanding of the macroeconomics of wage setting. In this research proposal, we meet this challenge by building models of wage contracts that can be estimated and tested with micro data, and integrated into larger business-cycle frameworks. Despite the prominence of wage rigidities in quantitative macroeconomic theories, the benchmark model of wage rigidities, widely used in both the academic literature and at central banks across the world, remains highly stylized. Although the importance of wage rigidities for macroeconomics dynamics is well understood, macroeconomic modelling of wage setting is too stylized and unrealistic to be confronted with micro data. This calls for a research program centered around the microeconomic foundations of wage setting, with the goal of producing models that can be disciplined by micro-level data and simultaneously easily integrated into larger frameworks for business-cycle analysis. The first project objective is to develop a macroeconomic framework for wage setting which can be confronted with micro data. The second, and complementary, project objective is to uncover microeconomic facts on wage setting, hours worked, and inflation which can be used to discipline our theories of wage setting. With micro-consistent models of wage rigidities, including the heterogeneous effects across workers, decisions made by governments, labor unions, and central banks can be guided by more credible evidence, which ultimately leads to improved decisions and economic welfare.